With the Bank of England reducing the base rate to just 0.25%, we look at the likely impact on mortgage and savings rates and pensions.
The Bank of England have cut interest rates to a new base rate of 0.25%. This is the first cut since 2009, and how welcome it is will depend on your financial situation. The Bank also announced a new round of quantitative easing (QE) – pumping money into the economy to buy government bonds.
What does the cut mean for mortgages?
For anyone with a fixed-rate mortgage, it does not mean anything. But if any of your borrowing is on a variable rate then it’s likely to be good news.
The 1.5 million borrowers with mortgages that track the base rate will see their monthly repayments fall, probably from the start of September. For a homeowner on the average variable mortgage rate of 2.86% and a mortgage of £150,000, a reduction in line with the base rate will mean monthly repayments falling by £19.68 to £687.
There are no longer any borrowers with tracker rates below the base rate, but there are some people lucky enough to be paying just 0.09% above the Bank base rate.
What about savers?
They have been suffering since the last interest rate cut and are likely to see returns fall further as a result of the Bank’s decision.
According to financial information firm Moneyfacts, there are 385 savings accounts that could end up offering no interest at all if banks and building societies pass on the whole reduction. It found 60 variable rate accounts on the market paying an interest rate of 0.25% or less, alongside 325 accounts that are closed to new business but still hold customers’ cash.
Will pensions be affected?
The interest rate cut and pumping more money into the markets by acquiring UK government bonds – a process known as quantitative easing – will hit new retirees and pension funds.
As a result of the Bank’s measures, the price of government bonds, known as gilts, has gone up. Gilts have a fixed rate of return, so as their price rises investors get less income – a lower interest rate – for their money.
Pension funds that offer a payout based on salaries often invest heavily in gilts, and the lower return available means they will face a struggle to meet their promises and deficits could grow. Annuities – the products offering an income for life for pension savers when they retire – are also linked to gilts. Annuity payouts have already fallen, and are set to fall further if returns from gilts remain low.
On a brighter note, for savers further from retirement, QE could also boost share prices as investors take on more risk in search of returns. This could be good news for anyone building up their pension.
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